The Investment Column: Stay with CRH despite lack of big deals

International Power; Dmatek
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The Independent Online

Those hoping to see the Irish building materials giant CRH wade into the merger and acquisition boom that has gripped the industry with a major takeover of its own will be disappointed. Ireland's second-biggest company does not do big acquisitions. Although it spent £1bn on deals last year, they were all small bolt-on purchases.

No one can blame CRH for this. It has a great track record of extracting value from such deals. Yesterday, the group's management told investors to expect more of the same. They rightly point out that on the whole, large scale tie-ups - such as last year's £4bn purchase of BPB by Saint-Gobain - do not have the best track record for delivering value. CRH says the problem with targeting rival players in the public company arena is the premium the market tends to demand for control. As a result the buyer usually ends up overpaying.

On the results front, CRH unveiled a great set of annual figures yesterday despite the pressures facing its industry. The most significant of these were rising raw material and energy costs. Thanks to the strength of the US construction market it was able to pass them on to its customers last year in the form of higher prices. Hence, CRH notched up a 16 per cent rise in pre-tax profits to €1.2bn (£820m). Trading in Europe was more subdued, especially in Benelux, France and Germany.

There have been fears that the booming US housing market, which has supported the likes of CRH for years, is starting to slow. Although a serious downturn will hit the group it is worth remembering the company also has significant exposure to public infrastructure projects which are expected to enjoy strong growth over the coming years after the Federal government approved a programme to build roads and upgrade old ones.

CRH shares have made good progress since this column tipped them in the summer. At €27.4 they trade at a discount to the wider building materials sector, which is unwarranted given the company's track record, and makes its shares a hold.

International Power

When times are good they tend to be positively electric at International Power. Yesterday, the power generator revealed a near doubling of annual profits (from £145m to £299m), an 80 per cent rise in its dividend and a bigger-than-expected fall in its debt burden.

All this is thanks to a recovery in UK and US power prices. The only blot on International Power's copy pad came from a weaker-than-expected performance by its Australian operations and greater-than-expected corporate costs, caused in part by a one-off pension provision.

International Power has interests in 37 power stations in 17 countries and last year produced 16.6 gigawatts - enough power to lightmore 220 million light bulbs at one time. Philip Cox, the chief executive, told investors yesterday he expects power prices in the US to continue their recovery. However, he failed to given any guidance on earnings in 2006.

The problem with International Power from an investment point of view is its dependence on wholesale electricity prices in the UK and US, which are tough to predict. To combat this, the company has tried to diversify its business to other parts of the world, and also employs sophisticated hedging efforts.

At 281p, International Power shares trade at a little less than 15 times forward earnings. This is a slight premium to the wider FTSE 100 and given the company is more risky that your average blue-chip company, its shares are a hold at current levels.


Dmatek has developed and is selling the kind of technology a totalitarian regime would die for. The group's electronic monitoring devices mean a person's every movement can be tracked by the authorities once a tag has been attached to their body. It is being piloted by the governments of a number of European countries as an anti-crime measure.

Dmatek is also working on "well-being monitoring" which will allows a person's body temperature, heart rate and other vital signs to be checked (it has not yet come up with a system which can tell what a person is thinking). The company says this type of technology can be used in the healthcare industry, especially for care of the elderly.

Dmatek is certainly cashing in on its technology. Yesterday, it reported an 87 per cent increase in profits to $3m (£1.7m) and these are forecast to rise to $3.8m by the end of this year. At 135p, the group's shares trade at 18 times forward earnings.

Given the company's growth rate, this is inexpensive and from a purely rational point of view the stock is a buy. But from a moral point of view, it is probably best avoided.